Following the turbulence of March, April was more sanguine and saw a continuation of the rally from a multiyear low in the equity market. Understandably, all focus continues to be on the development of the coronavirus outbreak and its impact on economies and companies.
It has been interesting to note that following the initial bounce from 23-26th March, there have been relatively modest returns for equities, although there have been strong periods. The three-day bounce in the UK market saw a 16.5% return from the low point, making it one of the sharpest recoveries in history. Elsewhere, the oil market has once again been grabbing headlines, with an oversupply, collapsing demand, and dwindling spare storage capacity for oil pushing some futures to trade negative, for the first time ever. While there are still some extreme moves, it appears that most markets are now becoming more able to deal with any liquidity needs than they were at the peak of the selling in March.
The gyrations have been influenced by the daily global coronavirus data and countered by the policy action taken by central banks and governments. Broadly, it appears that the policy responses have held off an immediate financial market meltdown and widespread social hardship. Resultingly, investors’ attention has turned to the medium- and longer-term impacts of the virus on companies’ ability to generate revenues and profits. Any impact will not fall evenly across sectors or companies, and there have been significant winners and losers through this period of market volatility.
The sentiment of the market over the month has been one of increasing optimism, that the lockdowns in place will be short-lived and solutions will be found. However, the economic impact of a sudden halt in activity is now clearly visible in the data and companies are beginning to give indications of the impact. Many companies have looked to preserve cash by cutting capital spending and slashing dividends. The highest-profile of these was Royal Dutch Shell, who cut its dividend for the first time since the Second World War, and causing a share price decline of 11% on the day.
Economic data has been deteriorating, as expected, and is likely to get worse before any improvement. Unemployment data from the US has shown the fastest spike in joblessness ever, with unemployment now well into the double digits. Similar pictures are emerging from Europe. The speed and strength of any recovery will be dependent on the length of the lockdown and how stringent the remaining restrictions are. Furthermore, the threat of an additional outbreak, another peak and second lockdown is also a potential scenario.
As a result, the outlook over the next few months and years is more uncertain than ever. Optimistic equity investors have more recently been keen to visualise a return to normality, while bond investors continue to price in more widespread defaults and disruption. The reality is likely to lie somewhere in between. Fortunately, equity prices remain some way off their peak, and much of the current situation is priced in.
There will now likely be a period where companies report little or no profits, particularly in the second quarter. However, the key question will be how companies’ medium and longer-term ability to generate returns is impaired by the coronavirus and policy responses, in addition to the shorter-term concerns around balance sheet strength and liquidity. This is likely to point to an acceleration away from sectors such as bricks and mortar retail and tourism, and towards sectors such as tech and healthcare, which may be better placed to adapt to the new environment. Moreover, with capital investment at very low levels, any change, or return to normality will present opportunities for those companies with the strength to take advantage.